China’s Addiction to U.S. Debt

China has accumulated at least $1.5 trillion in dollar assets, according to my Council on Foreign Relations colleague Brad Setser, so a (highly plausible) 30 percent move in the yuan-dollar rate would cost the country around $450 billion — about a tenth of its economy. And, to make the dilemma even more painful, China’s determination to control the appreciation of its currency forces it to buy billions more in dollar assets every month. Like an addict at a slot machine, China is adding to its hopeless bet, ensuring that its eventual losses will be even heavier.

The only market open to the P.R.C. and big enough to absorb its dollars is our bond market. That’s why China has at least $1.1 trillion, and maybe as much as $1.7 trillion, already invested in American bonds. That’s why China moved $200 billion into U.S. Treasury bonds last year, even though the interest rate was dropping like a stone. Beijing knows it has no real choice, even if it’s very useful to pretend it is America which has no choice.

But as hollow as China’s new international currency threats are, the threat from the Obama administration’s deficits is real. Scissors explains:

China is about to get much less important as a buyer of our bonds. The amount they buy is tied tight to their trade surplus with us, which isn’t going to soar this year and may drop. Meanwhile, the amount we are going to borrow (from everyone) is going to soar, so President Obama and Congress can have their $1.75 trillion deficit. While we’re patting ourselves on the back that Chinese bond purchases don’t mean much, we should remember that selling all these bonds to anyone is a sign the U.S. is in trouble.

Join The Discussion

It is beyond comprehension why US deficits to obscene levels (deadbeat status) is attractive because we think we have cornered China into continuing to buy our debt? Believe me, Chinese are not stupid. We are the ones that think they are.

Chinese are acquiring gold,commodities, mineral resources and oil and gas exploration rights all over the world using that dollar. In addition, they have signed a trade agreement with Brazil using currency other than dollar.

China is not buying our debt at the same rate they did previous years. So, the Fed. is monetizing the debt, meaning printing money. In a year or so, this gig will be up. The interest rates will have to go up high enough to attract anybody to buy the US debt. It has to be much higher so that the Fed. can soak up all the excess dollars floating to control the peak values of inflation that is also coming.

So, before you get too comfortable about the impossible position that China finds herself with regard to US Treasury purchase, think again where US is going to be in a couple of years. You would be wishing we had Carter years back.

I don't wish the following comment to be published at your site, although I'd like to share my take on this topic. This is what I wrote on my blog:

"It would be tantamount to political suicide if China decides to naively “sell” US treasuries to support its concerns, especially under the present environment which has been a fertile ground for engendering protectionist policies. For instance, recently some US lawmakers have revived efforts to brand China as a currency manipulator. Hence mass liquidations of treasuries would only fuel bilateral antagonism. And a trade war isn’t in the interest of China.

"Another, it isn’t also a certainty that the underlying motivation behind China’s purchases of US assets reflects on the same paradigm of “promoting exports” as it had been in the past. Past performance doesn’t guarantee future results-that’s because the incentives behind today’s conditions have radically changed. The US consumer model as the world’s growth engine has apparently been broken. And China appears to be well cognizant of this.

"Moreover, since China holds massive amount of US dollar assets- estimated at an astounding 82% of foreign currency reserves (Standard Chartered/New York Times)-any mass liquidation will most likely impact the markets extensively and stoke disorder. Where such actions will likely be mutually destructive, such policy directions will likely be avoided.

"Hence, China’s political actions should also be seen from a different prism- China may want to be seen in good light with the US, where she would continually support the US even at the risks of incurring substantial losses in its portfolio of US dollar assets.

"As Luo Ping, a director-general at the China Banking Regulatory Commission recently justified, “Except for U.S. Treasuries, what can you hold?”

"Moreover, China may want to project that in case a possible mayhem emerges in the financial markets this isn’t going be due to her doing. In other words, China seems to be placing the onus of the consequences from policy choices squarely on US shoulders."

I used to be a patent attorney thinking I would be of great help to our country economically, someday. While attending seminars on the legal aspects of patents over the years I noticed more and more persons of Asian decent. Money is simply a conduit for life's business. Intellectual property can with or without money provide transportation, food and shelter. Methinks we are viewing the new reality with blinders on. The accident of our systems wealth creating ability (notice I'm not talking simply about money wealth) has become known by others while we played "keep-away" with our own children. We have given away the goose that laid the golden eggs. Professor Ha jun Chang has written: The Bad Samaritans. He is on the verge of a brilliant understanding.

China is not stupid They are smarter tham we are They laughed at giethner and made Queen Nancy promise to Pay As you Go. Nancy does not understand, If you lie to China, they Might nuke us. They have already warned us not to disrespect thier dept.

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